Reinsurance Newsletter - September 2013: New York Federal Court Applying California Law Allows Trial On Prejudice Because Of Alleged Late Notice

more+
less-

Ins. Co. of PA. v. Argonaut Ins. Co., No. 12 Civ. 6494 (DLC), 2013 U.S. Dist. LEXIS 110597 (S.D.N.Y. Aug 6, 2013).

A New York federal court applying California law granted partial summary judgment to a reinsurer on the question of whether a seven-year delay in providing notice under a facultative certificate constituted late notice, permitting the reinsurer’s claim of prejudice from the delayed notice to proceed to trial.  The dispute arose from a series of underlying litigation involving the original insured, Kaiser Cement & Gypsum (“Kaiser”).  The cedent had issued excess umbrella coverage to Kaiser above the insured’s primary limit, and then facultatively reinsured some of that excess  liability with the reinsurer. The facultative certificate required the cedent to “promptly” notify the reinsurer of any occurrence that may implicate the reinsurer’s liability.  It also permitted the reinsurer the right to associate in the defense of any claim involving the certificate.

The cedent first received notice of a possible loss under the Kaiser policy in 1988 and notice from Kaiser that its primary limits had been exhausted was not received by the cedent until 2001.  The reinsurer did not receive notice of a possible claim either in 1988 or 2001.  From 2001 to 2009, extensive litigation occurred between Kaiser and its excess insurers, including the cedent here, but notice was still not provided to the reinsurer.  During this period, the reinsurer commuted its own retrocession agreements that would have covered part of the Kaiser liability, but was unaware of the Kaiser claim as it negotiated those commutations.  Notice was provided to the reinsurer in 2009 when the underlying dispute between the cedent and Kaiser was settled.

In finding that the cedent had breached the notice requirements in the reinsurance certificate, the court concluded that, at the very latest, notice should have been given to the reinsurer in 2002, when the insured filed a cross-claim against the cedent asserting a claim under the excess policy.  The court rejected the cedent’s claim that the reinsurer was constructively on notice of the claim because notice of Kaiser-related claims had been provided to the reinsurer’s broker under different reinsurance agreements.  In light of the seven-year delay in providing notice, the court found the cedent in breach of its contractual notice obligations.

The court concluded that the reinsurer was entitled to a trial on whether it had suffered prejudice as a result of the late notice.  The court acknowledged that the reinsurer had identified several plausible grounds for finding prejudice, including that it had entered into commutations of its own reinsurance program without the benefit of knowing about its Kaiser-related exposure.  The court also noted that the cedent’s counsel in the underlying litigation had refrained from taking a particular litigation position because that position would not have been helpful to other excess carriers litigating against Kaiser.  This “best interests of the group” approach could have been avoided had the reinsurer been permitted to associate in the defense of the Kaiser claim to ensure that its interests were protected.

Finally, the court addressed the question of whether the reinsurer could avoid having to prove prejudice if it instead could show that the cedent’s late notice was a result of bad faith.  Although the California Supreme Court has not ruled on whether a bad faith exception exists to the prejudice requirement, the court predicted that the California Supreme Court would in fact adopt such an exception.  The court permitted the reinsurer to take discovery on whether the cedent’s late notice was in bad faith and directed that the case then move to trial.